Allocation of Joint Costs and Accounting for By-products

BCSV

[COST ACCOUNTING]
Allocation of Joint Costs and Accounting for By-products

I. Theories
Multiple Choice
Select the letter of the best answer.

1. The point in a joint production process where each individual product

becomes separately identifiable is commonly called the:
A. decision point.
B. separation point.
C. individual product point.
D. split-off point.
E. joint product point.

2. The joint-cost allocation method that recognizes the revenues at split-off but
does not consider any further processing costs is the:
A. relative-sales-value method.
B. net-realizable-value method.
C. physical-units method.
D. reciprocal-accounting method.
E. gross margin at split-off method.

3. Which of the following methods should be selected if a company terminates

all processing at the split-off point and desires to use a cost-allocation
approach that considers the "revenue-producing ability" of each product?
A. Gross margin at split-off method.
B. Reciprocal-accounting method.
C. Relative-sales-value method.
D. Physical-units method.
E. Net-realizable-value method.

4. Which of the following choices correctly denotes the data needed to allocate
joint costs under the relative-sales-value method?
Sales Sales Value of
Value Separab Product After
of Product le Processing
at Split- Cost Beyond Split-Off
Off
A. Yes Yes No
B. Yes Yes Yes
C. Yes No No
D. No Yes Yes
E. No No Yes

5. When allocating joint costs, Wolstein calculates the final sales value of the
various products manufactured and subtracts appropriate separable costs.

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The company is using the:

A. gross margin at split-off method.
B. reciprocal-accounting method.
C. relative-sales-value method.
D. physical-units method.
E. net-realizable-value method.

6. Which of the following statements about joint-cost allocation is false?

A. Joint-cost allocation is useful in deciding whether to further process a
product after split-off.
B. Joint-cost allocation is useful in making a profit determination about
individual joint products.
C. Joint-cost allocation is helpful in inventory valuation.
D. Joint-cost allocation can be based on the number of units produced.
E. Joint-cost allocation can be accomplished by using several different
methods that focus on sales value and product "worth."

7. Consider the following statements about joint product cost allocation:

I. Joint product cost is allocated because it is necessary for inventory

valuation.
II. Joint product cost is allocated because it is necessary for making
economic decisions about individual products (e.g., sell at split-off or
process further).
III. Joint cost may be allocated to products by using several different
methods.

Which of the above statements is (are) correct?

A. I only.
B. III only.
C. I and II.
D. I and III.
E. I, II, and III.

8. Eastside Hospital has two service departments (Patient Records and

Accounting) and two "production" departments (Internal Medicine and Surgery).
Which of the following allocations would likely take place under the reciprocal-
services method of cost allocation?
A. Allocation of Accounting cost to Patient Records.
B. Allocation of Patient Records cost to Internal Medicine.
C. Allocation of Surgery cost to Accounting.
D. Allocation of Internal Medicine cost to Surgery.
E. Allocations "A" and "B" above.

9. Westside Hospital has two service departments (Patient Records and

Accounting) and two "production" departments (Internal Medicine and Surgery).
Which of the following allocations would not take place under the reciprocal-services
method of cost allocation?
A. Allocation of Accounting cost to Patient Records.
B. Allocation of Patient Records cost to Internal Medicine.

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C. Allocation of Surgery cost to Accounting.

D. Allocation of Internal Medicine cost to Surgery.
E. Allocations "C" and "D" above.

10. If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n)
a. mixed cost process.
b. joint process.
c. extractive process.
d. reduction process.

11. Joint costs are allocated to joint products to

a. obtain a cost per unit for financial statement purposes.
b. provide accurate management information on production costs of each
type of product.
c. compute variances from expected costs for each joint product.
d. allow the use of high-low analysis by the company.

12. Joint costs are allocated to which of the following products?

By-products Scrap

a. yes yes
b. yes no
c. no no
d. no yes

13. Joint cost allocation is useful for

a. decision making.
b. product costing.
c. control.
d. evaluating managers' performance.

14. Joint costs are useful for

a. setting the selling price of a product.
b. determining whether to continue producing an item.
c. evaluating management by means of a responsibility reporting system.
d. determining inventory cost for accounting purposes.

15. Which of the following components of production are allocable as joint costs when a
single manufacturing process produces several salable products?
a. direct material, direct labor, and overhead
b. direct material and direct labor only
c. direct labor and overhead only
d. overhead and direct material only

16. Each of the following is a method to allocate joint costs except

a. relative sales value.
b. relative net realizable value.
c. relative weight, volume, or linear measure.

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d. average unit cost.

17. Joint costs are most frequently allocated based upon relative
a. profitability.
b. conversion costs.
c. prime costs.
d. sales value.

18. When allocating joint process cost based on tons of output, all products will
a. be salable at split-off.
b. have the same joint cost per ton.
c. have a sales value greater than their costs.
d. have no disposal costs at the split-off point.

19. If two or more products share a common process before they are separated, the
joint costs should be assigned in a manner that
a. assigns a proportionate amount of the total cost to each product on a
quantitative basis.
b. maximizes total earnings.
c. minimizes variations in unit production costs.
d. does not introduce an element of estimation into the process of
accumulating costs for each product.

20. Scrap is defined as a

a. finished unit of product that has no sales value.
b. residual of the production process that has limited sales value.
c. residual of the production process that can be reworked for sale as an
irregular unit of product.
d. residual of the production process that has no sales value.

21. Waste created by a production process is

a. accounted for in the same manner as defective units.
b. accounted for as an abnormal loss.
c. material that can be sold as an irregular product.
d. discarded rather than sold.

22. While preparing a salad, you remove the core of a head of lettuce. This core would
be classified as
a. defective.
b. shrinkage.
c. waste.
d. scrap.

23. Which of the following is/are synonyms for joint products?

Main products Co-products

a. no no
b. yes yes

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c. yes no
d. no yes

24. In a lumber mill, which of the following would most likely be considered a
primary product?
a. 2 x 4 studs
b. sawdust
c. wood chips
d. tree bark

25. Fisher Company produces three products from a joint process. The products can be
sold at split-off or processed further. In deciding whether to sell at split-off or
process further, management should
a. allocate the joint cost to the products based on relative sales value prior
to making the decision.
b. allocate the joint cost to the products based on a physical quantity
measure prior to making the decision.
c. subtract the joint cost from the total sales value of the products before
determining relative sales value and making the decision.
d. ignore the joint cost in making the decision.

26. By-products are

a. allocated a portion of joint production cost.
b. not sufficient alone, in terms of sales value, for management to justify
undertaking the joint process.
c. also known as scrap.
d. the primary reason management undertook the production process.

27. Which of the following statements is true regarding by-products or scrap?

a. Process costing is the only method that should result in by-products or
scrap.
b. Job order costing systems will never have by-products or scrap.
c. Job order costing systems may have instances where by-products or
scrap result from the production process.
d. Process costing will never have by-products or scrap from the
production process.

28. Which of the following has sales value?

By-products Waste

a. no no
b. yes no
c. yes yes
d. no yes

29. Under an acceptable method of costing by-products, inventory costs of the by-
product are based on the portion of the joint production cost allocated to the by-product
a. but any subsequent processing cost is debited to the cost of the main

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product.
b. but any subsequent processing cost is debited to revenue of the main
product.
c. plus any subsequent processing cost.
d. minus any subsequent processing cost.

30. Which of the following is a false statement about scrap and by-products?
a. Both by-products and scrap are salable.
b. A by-product has a higher sales value than does scrap.
c. By-products and scrap are the primary reason that management
undertakes the joint process.
d. Both scrap and by-products are incidental outputs to the joint process.

31. The split-off point is the point at which

a. output is first identifiable as individual products.
b. joint costs are allocated to joint products.
c. some products may first be sold.
d. all of the above.

32. A product may be processed beyond the split-off point if management believes that
a. its marketability will be enhanced.
b. the incremental cost of further processing will be less than the
incremental revenue of further processing.
c. the joint cost assigned to it is not already greater than its prospective
selling price.
d. both a and b.

33. Which of the following would not be considered a sunk cost?

a. direct material cost
b. direct labor cost
c. joint cost
d. building cost

34. The definition of a sunk cost is

a. a cost that cannot be recovered regardless of what happens.
b. a cost that relates to money poured into the ground.
c. considered the original cost of an item.
d. also known as an opportunity cost.

35. The net realizable value approach mandates that the NRV of the by-products/scrap
be treated as
a. an increase in joint costs.
b. a sunk cost.
c. a reduction of joint costs.
d. a cost that can be ignored totally.

36. The net realizable value approach is normally used when the NRV is expected to be

insignificant significant

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a. yes yes
b. no yes
c. no no
d. yes no

37. Approximated net realizable value at split-off for joint products is computed as
a. selling price at split-off minus further processing and disposal costs.
b. final selling price minus further processing and disposal costs.
c. selling price at split-off minus allocated joint processing costs.
d. final selling price minus a normal profit margin.

38. Which of the following is a commonly used joint cost allocation method?
a. high-low method
b. regression analysis
c. approximated sales value at split-off method
d. weighted average quantity technique

39. Incremental separate costs are defined as all costs incurred between ___________
and the point of sale.
a. inception
b. split-off point
c. transfer to finished goods inventory
d. point of addition of disposal costs

40. All costs that are incurred between the split-off point and the point of sale are
known as
a. sunk costs.
b. incremental separate costs.
c. joint cost.
d. committed costs.

41. Incremental revenues and costs need to be considered when using which allocation
method?

Physical measures Sales value at split-

off

a. yes yes
b. yes no
c. no no
d. no yes

42. The method of pricing by-products/scrap where no value is assigned to these items
until they are sold is known as the
a. net realizable value at split-off point method.
b. sales value at split-off method.
c. realized value approach.
d. approximated net realizable value at split-off method.

43. Relative sales value at split-off is used to allocate

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costs beyond split-off joint costs

a. yes yes
b. yes no
c. no yes
d. no no

44. For purposes of allocating joint costs to joint products using the relative sales value
at split-off method, the costs beyond split-off
a. are allocated in the same manner as the joint costs.
b. are deducted from the relative sales value at split-off.
c. are deducted from the sales value at the point of sale.
d. do not affect the allocation of the joint costs.

45. Not-for-profit organizations are required by the _______ to allocate joint costs.
a. AICPA
b. FASB
c. CASB
d. GASB

True or False.
Write T if the statement is true otherwise, Write F.

1. Joint costs occur after the split-off point in a production process

2. Joint costs occur before the split-off point in a production process
3. Joint costs are allocated to by-products as well as primary products.
4. The primary distinction between by-products and scrap is the difference in sales
value.
5. The primary distinction between by-products and scrap is the difference in volume
produced.
6. The point at which individual products are first identifiable in a joint process is
referred to as the split-off point
7. Joint costs include all materials, labor and overhead that are incurred before the
split-off point.
8. Two methods of allocating joint costs to products are physical measure allocation
and monetary allocation.
9. A decision that must be made at split-off is to sell a product or process it further.
10. Allocating joint costs based upon a physical measure ignores the revenue-
generating ability of individual products.
11. Allocating joint costs based upon a physical measure considers the revenue-
generating ability of individual products.
12. Monetary allocation measures recognize the revenue generating ability of each
product in a joint process.
13. The relative sales value method requires a common physical unit for measuring the
output of each product.
14. Joint costs are allocated to main products, but not to by-products
15. Net realizable value equals product sales revenue at split-off plus any costs
necessary to prepare and dispose of the product.

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16. Net realizable value equals product sales revenue at split-off minus any costs
necessary to prepare and dispose of the product.
17. If incremental revenues beyond split-off are less than incremental costs, a product
should be sold at the split-off point.
18. If incremental revenues beyond split-off exceed incremental costs, a product should
be processed further.
19. The net realizable value approach requires that the net realizable value of by-
products and scrap be treated as a reduction in joint costs allocated to primary
products.
20. Net realizable value is considered to be the best measure of the expected
contribution of each product to the coverage of joint costs.
21. The net realizable value approach is used to account for scrap and by-products
when the net realizable value is insignificant.
22. The net realizable value approach is used to account for scrap and by-products
when the net realizable value is significant.
23. Under the realized value approach, no value is recognized for by-products or scrap
until they are actually sold.
24. Under the net realizable value approach, no value is recognized for by-products or
scrap until they are actually sold.
25. Not-for-profit entities are required to allocate joint costs among fund-raising,
program, and administrative functions.

II. Problems

Problem I
Mercury Corporation allocates joint costs by using the net-realizable-value method.
In the company's Michigan plant, products D and E emerge from a joint
process that costs P 250,000. E is then processed at a cost of P 220,000 into
products F and G. Data pertaining to D, F, and G follow.

D F G
Costs beyond split-off P50,00 P27,00 P25,00
0 0 0
Selling price 40 38 50
Pounds produced 10,000 4,000 2,000

Required:
1. Allocate the P 220,000 processing cost between products F and G.
2. From a profitability perspective, should product E be processed into
products F and G?

Problem II
Barry Company manufactures X-111, X-112, and X-113 from a joint process. The
following information is available for the period just ended:

X-111 X-112 X-113 Total

Units produced 6,00 14,000 30,000 50,000
0
Joint cost allocation 1 P18,400 3 P 80,000

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Sales value at split- P104,00 2 4 P 260,000

off 0

Required:
3. Assume that Barry does not use the physical-units method but instead
allocates joint costs by using the relative-sales-value method. Find the
four unknowns in the preceding table.

Problem III
Suppose that one hog yields 300 pounds of ham, 200 pounds of chops, and 100
pounds of miscellaneous items. The sales value of ham is $1.20 per pound;
chops, $1.50 per pound; and miscellaneous items, $0.90 per pound. The hog
costs $580, and processing costs are $20.

Required:
4. Determine the proper allocation of joint costs to the three products by
using the physical-units method.
5. Repeat the process by using the relative-sales-value method.

Problem IV
Higgins Corporation manufactures two chemicals (Flextra and Hydro) in a joint
process. Data from a recent month follow.

Direct materials used: $360,000

Direct labor: $150,000
Manufacturing overhead: $690,000
Manufacturing output:
Flextra: 40,000 gallons
Hydro: 120,000 gallons

Flextra sells for $15 per gallon and Hydro sells for $20 per gallon.

Required:
6. Compute the total joint costs to be allocated to Flextra and Hydro.
7. Compute the joint costs that would be allocated to Flextra by using the
physical-units method.
8. Compute the joint costs that would be allocated to Hydro by using the
relative-sales-value method.
9. Assume that Hydro can be converted into a more refined product, Hydro-
R, in a totally separable process at an additional cost of $4 per gallon.
Hydro-R can be sold in the marketplace for $26 per gallon.
a. Compute the net realizable value of Hydro-R.
b. If Higgins allocated $800,000 of joint cost to Hydro-R and sold 90% of
the production completed, determine the cost of remaining Hydro-R
that would be transferred to the companys month-end balance sheet
as finished-goods inventory.

Problem V
Ohio Chemical manufactures two industrial chemicals in a joint process. In
October, direct material costing $120,000 was processed at a cost of

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$300,000, resulting in 16,000 pounds of Pentex and 4,000 pounds of Glaxco.

Pentex sells for $35 per pound and Glaxco sells for $60 per pound.
Management generally processes each of these chemicals further in
separable processes to produce more refined products. Pentex is processed
separately at a cost of $7.50 per pound, with the resulting product, Pentex-R,
selling for $45 per pound. Glaxco is processed separately at a cost of $10 per
pound, and the resulting product, Glaxco-R, sells for $100 per pound.

Required:
10.Compute the company's total joint production costs.
11.Assuming that total joint production costs amounted to $500,000, allocate
these costs by using:
A. The physical-units method.
B. The relative-sales-value method.
C. The net-realizable-value method.

Problem VI
Douglas Company, a new firm, manufactures two products, J and K, in a
common process. The joint costs amount to $80,000 per batch of finished
goods. Each batch results in 20,000 liters of output, of which 80% are J and
20% are K.

The two products are processed beyond the split-off point, with Douglas
incurring the following separable costs: J, $2 per liter; K, $5 per liter. After the
additional processing, the selling price of J is $12 per liter, and the selling
price of K is $15 per liter.

Required:
12.Determine the proper allocation of joint costs if the company uses the net-
realizable-value method.
13.Assume that Douglas sold all of its production of K during the current
accounting period. Compute K's sales revenue, cost of goods sold, and
gross margin.

Problem VII

Ratcliff Company produces two products from a joint process: X and Z. Joint
processing costs for this production cycle are $8,000.

Disposal
Sales price cost per Further Final sale
per yard at yard at processing price per
Yards split-off split-off per yard yard
X 1,500 $6.00 $3.50 $1.00 $ 7.50
Z 2,200 9.00 5.00 3.00 11.25

If X and Z are processed further, no disposal costs will be incurred or such costs will
be borne by the buyer.

14.Using a physical measure, what amount of joint processing cost is

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allocated to X (round to the nearest dollar)?

15.Using a physical measure, what amount of joint processing cost is
allocated to Z (round to the nearest dollar)?
16.Using sales value at split-off, what amount of joint processing cost is
allocated to X (round to the nearest dollar)?
17.Using sales value at split-off, what amount of joint processing cost is
allocated to Z (round to the nearest dollar)?
18.Using net realizable value at split-off, what amount of joint processing
cost is allocated to X (round to the nearest dollar)?
19.Using net realizable value at split-off, what amount of joint processing
cost is allocated to Z (round to the nearest dollar)?
20.Using approximated net realizable value at split-off, what amount of joint
processing cost is allocated to X (round to the nearest dollar)?
21.Using approximated net realizable value at split-off, what amount of joint
processing cost is allocated to Z (round to the nearest dollar)?
22.Which product(s) would be processed further?

Problem XIII
Gordon Company produces three products: A, B, and C from the same process. Joint
costs for this production run are $2,100.

Disposal
Sales price cost per Further Final
per lb. at lb. at processing sales price
Pounds split-off split-off per pound per pound
A 800 $6.50 $3.00 $2.00 $ 7.50
B 1,100 8.25 4.20 3.00 10.00
C 1,500 8.00 4.00 3.50 10.50

If the products are processed further, Gordon Company will incur the following
disposal costs upon sale: A, $3.00; B, $2.00; and C, $1.00.

23.Using a physical measurement method, what amount of joint processing

cost is allocated to Product A (round to the nearest dollar)?
24.Using a physical measurement method, what amount of joint processing
cost is allocated to Product B (round to the nearest dollar)?
25.Using sales value at split-off, what amount of joint processing cost is
allocated to Product B (round to the nearest dollar)?
26.Using sales value at split-off, what amount of joint processing cost is
allocated to Product C (round to the nearest dollar)?
27.Using net realizable value at split-off, what amount of joint processing
cost is allocated to Product A (round to the nearest dollar)?
28.Using net realizable value at split-off, what amount of joint processing
cost is allocated to Product C (round to the nearest dollar)?

Problem IX
Sabrina Company is placing an ad in the local paper to advertise its products. The
ad will run for one week at a total cost of $5,500. Sabrina Company has four
categories of products as follows:

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% of floor space Expected sales

occupied value
Hardware 20% $35,000
Hand Tools 15 15,000
Lawn Furniture 45 64,500
Light Fixtures 20 25,500

29.What amount of advertising cost should be allocated to hardware,

assuming Sabrina allocates based on percent of floor space occupied?
30.Assume that Sabrina decides to allocate based on expected sales value.
What amount of advertising cost should be allocated to light fixtures
(round to the nearest dollar)?

Problem XI
Whalen Company manufactures products X and Y from a joint process that also
yields a by-product, Z. Revenue from sales of Z is treated as a reduction of joint
costs. Additional information is as follows:

Products
X Y Z Total
Units produced 20,000 20,000 10,000 50,000
Joint costs ? ? ? $262,000
Sales value at
split-off $300,000 $150,000 $10,000 $460,000

Joint costs were allocated using the sales value at split-off approach

31.The joint costs allocated to product X were?

32.The joint costs allocated to product Y were?

Problem XII
Tropical Company manufactures three products in a joint process which costs
$25,000. Each product can be sold at split-off or processed further and then sold.
10,000 units of each product are manufactured. The following information is
available for the three products:

Sales Separable
Product Value Processing Sales Value
at Split-off Costs after at Completion
Split-off
A $12 $9 $21
B 10 4 17
C 15 6 19

33.. If Product A is processed beyond the split-off point, profit will? (answer
by increase or decrease by (amount) or no change)
34.To maximize profits, which products should Tropical process further?

Problem XIII

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Wallace Company produces only two products and incurs joint processing costs that
total $3,750. Products Alpha and Beta are produced in the following quantities
during each month: 4,500 and 6,000 gallons, respectively. Wallace Company also
runs one ad each month that advertises both products at a cost of $1,500. The
selling price per gallon for the two products are $20 and $17.50, respectively.

35. What amount of joint processing costs is allocated to each product based on
gallons produced?
36. What amount of advertising cost is allocated to each product based on sales
value?

Problem XIV
Gable Company produces two main products jointly, A and B, and C, which is a by-
product of B. A and B are produced form the same raw material. C is manufactured
from the residue of the process creating B.
Costs before separation are apportioned between the two main products by the net
realizable value method. The net revenue realized from the sale of C is deducted
from the cost of B. Data for April were as follows:

Costs before separation $200,000

Costs after separation:
A 50,000
B 32,000
C 4,000

Production for April, in pounds:

A 800,000
B 200,000
C 20,000

Sales for April:

A 640,000 pounds @ $.4375
B 180,000 pounds @ .65
C 20,000 pounds @ .30

37. Determine the gross profit for April.

Problem XV
Leigh Manufacturers produces three products from a common manufacturing
process. The total joint cost of producing 2,000 pounds of Product A; 1,000 pounds
of Product B; and 1,000 pounds of Product C is $7,500. Selling price per pound of
the three products are $15 for Product A; $10 for Product B; and $5 for Product C.
Joint cost is allocated using the sales value method.

Required:
38. Compute the unit cost of Product A if all three products are main
products.

39. Compute the unit cost of Product A if Products A and B are main
products and Product C is a by-product for which the cost reduction

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method is used.

Problem XVI
McQueen Company processes raw material in Department 1 from which come two
main products, A and B, and a by-product, C. A is further processed in Department
2, B in Department 3, and C in Department 4. The value of the by-product reduces
the cost of the main products, and sales value is used to allocate joint costs.

Dept 1 Dept 2 Dept 3 Dept 4

Cost Incurred: $90,000 $10,000 $8,000 $10,000
Production:
A 10,000 lbs.
B 20,000 lbs.
C 10,000 lbs.

Selling Price:
A $10/lb.
B $5/lb.
C $2/lb.

Required:

40. Compute unit costs for A and B.

41. Ending inventory consists of 5,000 lbs. of B and 1,000 lbs. of C.

What is the value of the inventory?

42. Recompute a and b allocating cost based on net realizable value.

~~~~

Suggested Key
I. Theories
Multiple choice
1. D 16. D 31. D
2. A 17. D 32. D
3. C 18. B 33. D
4. C 19. A 34. A
5. E 20. B 35. C
6. A 21. D 36. B
7. D 22. C 37. B
8. E 23. B 38. C
9. E 24. A 39. B
10.B 25. D 40. B
11.A 26. B 41. C

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12.C 27. C 42. C

13.B 28. B 43. C
14.D 29. C 44. D
15.A 30. C 45. A

True or False
1. F 10. T 19. T
2. T 11. F 20. T
3. F 12. T 21. F
4. T 13. F 22. T
5. F 14. T 23. T
6. T 15. F 24. F
7. T 16. T 25. T
8. T 17. T
9. T 18. T

II. Problems
1. F - 137,500 ; G - 15. 4,757 29. 1,100
82,500
2. No 16. 2,500 30. 1,002
3. 1-32,000 ; 2-59,800 ; 17. 5,500 31. 168,000.
3-29,600 ; 4-96,200
4. H 300; C- 200; MI- 18. 2,390 32. 84,000
100
TOTAL: 600
5. H-288; C-240; MI-72 19. 5,610 33. no change.
TOTAL: 600
6. 1,200,000 20. 3,090 34. Product C only
7. 300,000 21. 4,910 35. $1,607 & $2,143,
respectively.
8. 960,000 22. only X 36. 692 and 808
9. A- 2,640,000. 23. 494 37. 165,000
B- 128,000
10.420,000 24. 679 38. 2.50
11.A- Pentex 400,000 25. 725 39. $.9375
Glaxco 100,000
B- Pentex 350,000
Glaxco 150,000
C-Pentex-R 312,500
Glaxco-R 187,500
12.J - 64,000 26. 959 40. A 4.50; B 2.15
K 16,000
13.Sales revenue- 27. 444 41. 12,750
60,000
CGS 36,000
Gross profit 24,000
14.3,243 28. 951 42. A- 4.46; B 2.17 EI 12,850

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Allocation of Joint Costs and Accounting for By-products
BCSV

Page 17 of 17